Should An Employee’s Pay Be Based On Their Performance?

There are numerous different schools of thought out there when it comes to how employees should be paid. Some employers prefer a flat salary because it draws high-end staff members that want assurance they’ll be paid what they’re worth. Others opt for performance pay because it encourages workers to become more productive in order to achieve higher levels of income.

In recent years, performance pay has become the more popular option in many companies, especially those that are small or just beginning to see substantial growth. This pays off sometimes because employees are more motivated to meet business goals since they’re in-line with the income-garnering goals they set for themselves. To determine if performance pay is a wise move for your company, it’s important to look at both its pros and cons:

How Performance Pay Boosts Productivity

If you ask any economist out there, they’ll surely tell you that the ability for an employee to earn more through hard work will encourage them to strive to do their best. This relationship is the basis of capitalism, and can be a powerful tool in your business. Performance pay often serves as an incentive for your workers to raise performance in order to earn a bonus or reach the next pay bracket. For some positions, oftentimes those in sales, performance pay can make up most, if not all, of an employee’s salary. For other jobs, it could be a significant bonus at the end of the quarter or year. By and large, employees work because they want to earn money. By correlating the amount earned with the results they provide, the end product is often a win-win situation for both the business and the worker.

The Downside Of Paying Based On Performance

In theory, performance pay seems to be a practical way of compensation for many positions in the workplace, but in real life that is not always the case. Even when there are quantifiable benchmarks for the employees to reach such as a certain level or sales or low number of customer complaints, performance pay can encourage less-than-honest workers to falsify or otherwise manipulate the figures. When there aren’t quantifiable benchmarks to measure an employee’s performance against, formulating compensation in this manner can be quite subjective to the managers handling the employees’ performance appraisals. This can result in not only discontent among workers, but also potentially open your business up to legal action by those who feel their performance review, and in turn their paycheck, was unfairly calculated.

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When deciding whether to pay your employees based on a flat-rate salary or performance pay, the smartest option is often a combination of the two. There are pros and cons with each option, so incorporating the strong points from both methods can result in acquiring the best human capital for your organization. Offering employees a competitive base salary will help attract and retain top-notch employees who are guaranteed pay, free from the effects of situations out of their control, such as an overall weak economy or problems further up the corporate ladder. At the same time, offering a meaningful, yet reasonable, bonus or performance pay based on comprehensive and measureable criteria will encourage your already highly-performing workers an incentive to grow your business even further.

While putting an emphasis on performance pay is great for some positions such as sales where there is a direct financial gain to the organization for every dollar earned by the employee, it is not always the best choice. When goals cannot be directly measured, or do not necessarily benefit the company’s bottom line and future growth, performance pay can actually stunt an organization’s development. For most situations, the ideal compensation plan is a carefully calculated combination of a fair base salary and the potential for an attractive performance-based bonus.

About the Author: Edd Rennolls is a passionate freelancer who enjoys the ability to work from home promoting Wrangle.ca and being able to spend time with his family. Edd enjoys sharing his HR knowledge with business owners and other HR professionals in the industry.